Talking Points: September 16, 2022

The keyword for markets going forward is instability.

Following Tuesday’s unexpectedly higher CPI numbers, the market has been forced to abandon its hope for a quick end to inflation and a Fed pivot.

Instead markets must confront the following:

Inflation that is going to be higher for longer.

• Most tellingly, the inflation measures most representative of entrenched inflation (Core CPI, Median and Trimmed Mean CPI, and Sticky CPI) are not showing any signs of slowing down (see charts below).
• Outside of gasoline, food prices affect consumers most and food prices are not moderating. Food inflation was up +11.5% and grocery inflation is running at +13.5% year-over-year (highest since 1979).

A Federal Reserve that is laser-focused on defeating inflation.

• The Fed is not going to pivot anytime soon.
• As Chairman Powell stated at Jackson Hole, they are willing to take “forceful and rapid steps to moderate demand.”

Higher interest rates until prices moderate enough to satisfy the Fed.

• More rate hikes are on the way as the terminal Fed Funds rate may need to be even higher in order to effectively curb demand (see chart below).

Slower demand means a slowing economy means reduced earnings.

• A recession may be needed to stop stubborn inflation.
• Investors must be prepared for such a recession/slowdown to show up in a company’s bottom lines.

This makes for an unstable, uncertain market.

• There are few catalysts to buy when the market is staring down the barrel of the inevitable: a forced economic contraction that might, we hope, stabilize prices.